Dollar: Temporary bounce or start of something new?

By John Spence

Pretty much everything has risen since the beginning of September as the dollar’s decline picked up steam on QE2 expectations. Today we’re seeing the dark side of that relationship as the dollar rallies. The Dow was off more than 200 points earlier to dip below 11,000. The VIX shot up by more than 10%.

There aren’t many places to hide today other than the dollar and Treasurys, with stocks, commodities and metals taking decent hits.

FXE and FXY are trading lower as the euro and yen weaken against the greenback. Jitters over Ireland and a desire for safety may be helping drive the dollar trade.

With commodity and equity markets seeming to take their cues from currency moves, investors should keep an eye on currency ETFs such as UUP (dollar bullish) and FXE (euro).

UUP is threatening to break above $23 for the first time since late September. A big question here is whether this is a temporary bounce in the dollar, or the start of a more serious unwinding of the reflation trade.